Showing posts from 2012

Cliffhanger: The fiscal cliff bargaining game

The negotiations over the fiscal cliff in the US are entering its final stages . The current situation is a stand-still, where both sides know the concessions they need to make, but neither is willing to make the first move and loose leverage. The Republicans are unwilling to make concessions on tax increases to high-income earners, while the Democrats are refusing to reign in the welfare system and finally reform it. The situation is close to a classical hawk-dove game (or even better a game of deterrence  in which neither of the two actors are willing to back off. We've heard arguments from both sides claiming that if no agreement is reached the other side is willing to “push” the US over the fiscal cliff. In particular if either of the sides is unwilling to back off from cutting spending or raising taxes , then both will have to agree to a status quo level of automatic deep spending cuts and big tax hikes. Only then will we experience the full effects of a completely wrong

Happy 2013!? (the yearly predictions)

This time last year I finished off with a post summarizing briefly the predictions on the upcoming year. I was surprised to see that I was right on several predictions. Here's what I've written back then , for the US, UK and Eurozone economies:  Unemployment is still at high levels and is likely only to rise. Output on the other hand, as well as investments, are likely to fall. Stagnation is upon us. Ok, so the US has experienced stronger growth ( 3.1% in Q3 ) and falling unemployment ( 7.7 % in November ) (even though the employment-population ratio is still stagnant), but the shadow of the fiscal cliff looms over the entire 2013. For Britain and the Eurozone the prediction was spot on - the recession re-emerged in the form of a "double-dip". 2013 doesn't look that good either, even though the US could turn out to be much bette r if the fiscal cliff is avoided.  Further more, this part of the previous text summarizes not just the past year, but the

Understanding the "growth problem"

Buttonwood , a columnist in the Economist, had a recent column on the "Growth problem" in the West. He seems to hold strongly to the austerity vs. growth paradigm and claims that the issue of declining economic growth has been a problem in the West for quite some time:  Source: Buttonwood, The Economist  "But it is worth remembering that Europe's growth problems did not start in 2010. As the table shows, real growth rate in the six European countries featured above has been slower in each successive decade (on average); the drop between the 1960s and the noughties was a staggering 54 percentage points. The US, which is shown for contrast, saw fairly steady growth from the 1970s to the 1990s before dropping off this century. ... It may well be that European economies would perform better collectively if austerity programmes were relaxed. But it is a stretch to believe that Europe can return to the growth rates seen in the 1960s or even the 1970s. And t

Explaining the US "fiscal cliff"

From the Economist comes a good video on what is the fiscal cliff all about: The Wall Street Journal offered their own interactive feature called "Make your own deficit-reduction plan" . So I did. Feel free to check it out here . Please be aware that I was being politically careful when I was making this "plan". On the tax side I extended the Bush tax cuts for middle income families, and focused mostly on easing out tax deductions (here is where I agree with the Economist in pointing out to eliminate tax breaks rather than increasing the tax rates - recall an earlier text on taxes ). I've also found this part interesting: "Tax greenhouse-gas emissions by setting up a program to force polluters to buy a permit for each ton of carbon dioxide emitted into the atmosphere" . Sounds like a good Coase solution to an externalities problem, particularly if these permits could be bought and sold on the market. This, I feel, is one of the best possib

"The World's most important chart", courtesy of Goldman Sachs

In an interview for Business Insider , the chief economist of Goldman Sachs, Jan Hatzius, predicts an acceleration of US economic growth in the second quarter of 2013. Business Insider points out that Mr Hatzius had the foresight to predict the housing boom in 2007 (so at least a year after Shiller, Roubini, Schiff and many others ), and has a unique framework for analyzing the economy. After all, he is the top economist of Goldman Sachs which is by itself worth (some sort of) admiration.  He stressed out the following chart depicting the relationship between private sector savings and government budget deficits (click to enlarge):  Source: Goldman Sachs (2012) "The US Economy in 2013-2016: Moving Over the Hump" via Business Insider Here's the logic behind it:  "The chart demonstrates a critical economic concept: Government deficits (the grey line) are essentially the mirror image of private sector savings (the dark black line). When the private s

Graph of the week: Where's the money?

The Wall Street Journal brings the following story: "$8.4 trillion: The amount of debt owed by U.S. corporations at the end of September.   When policymakers at the Federal Reserve meet next week, one of their main agenda items will be assessing the effectiveness of their latest bond-buying program, known as “quantitative easing” or QE. A key goal of the program is to stimulate the economy by driving down interest rates, making it cheaper for companies and individuals to borrow. More borrowing, the Fed hopes, will lead to more spending, more investing and, crucially, more hiring." Source: WSJ Real Time Economics blog One should ask himself, with all this debt pilling up, where is the money ending up? The logical explanation is to pay off former debt thereby paying off the creditors (have in mind that the graph shows nonfinancial corporate debt). Is this how the deleveraging process is supposed to work? Piling up more debt to pay off the former debt? According t

CPS: "Technology - a friend or foe"

A new text of mine gets published at the Centre for Policy Studies blog, entitled "Technology - a friend or foe" . For all my CPS writings see here . The text is about the joint effect of the third industrial revolution and the recent crisis on the restructuring of the labour market in the West. It's premise is that companies failed to adjust to the pre-crisis technological changes due to a range of (mostly political) constraints and other market rigidities. After the onset of the crisis abrupt restructuring of the labour market took place. The crisis was a trigger point for the companies to apply the necessary adjustments. This theory is similar to the logical conclusions of the PSST theory devised by Arnold Kling, and referred to in a previous text on the fiscal stimulus.  Here's an excerpt, but you can read the whole text here : "...The so-called third industrial revolution, or the IT revolution, manifested during the last 20 years. However during t

Igniting the recovery? Fiscal policy and aggregate demand

From David Beckworth comes the following graph on the effect of fiscal policy (fiscal contraction) in the crisis and its effect on aggregate demand: Source: David Beckworth's blog: Macro and Other Market Musings HT: Tyler Cowen Here's what he concludes: "This first figure shows that aggregate demand growth has not been affected by a tightening of fiscal policy since 2010. Specifically, it shows that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures." It seems to me that even before the crisis there hasn't been a clear corr elation between the two variables. Base d on this graph (and on the other one he shows in his text) it's far from concluding anything on the effects of counter-cyclical fiscal policy or its low multiplier. And this was the  center-point behind Beckworth's argument that fiscal policy is ineffective in igniting the recovery. As the regular reader

Minimum wages: the ultimate effect

Note: This article was written for and published on the Adam Smith Institute blog , entitled "Minimum Wages: examining the research". For all my other ASI writings see here . The Economist's Free Exchange column analyzed some of the existing research on this controversial topic. They point out to a number of results that claim how moderate minimum wages do more harm than good for the economy, and can, in fact, have a net positive impact on total employment.  The argument from the left of the political and economic spectrum usually claims that employers tend to sometimes act as monopsonists and can set wages below a competitive rate. In addition minimum wages are supposed to solve the problem of wage inequality and increase the disposable income of lower paid workers. The Economist calls upon the results on two "noted labour economists", David Card and Alan Krueger , who accounted an increase of employment in New Jersey's fast-food restaurants to it

Graph(s) of the week: adapting to technology

The Economist produced a great video this week in which it analyzes the US daily newspapers subscriptions and circulation. What's most interesting here is the analysis behind the recent success of the New York Times (NYT) and the Wall Street Journal (WSJ) and the downfall of USA today and LA Times. The reason in the divergence between these two groups of daily newspapers is in the adjustment of their demand to online subscribers. (see graphs below) New York Times print and online circulation. Source: The Economist Wall Street Journal print and online circulation. Source:  The Economist  USA Today and LA Times print and online circulation. Source:  The Economist This is a perfect example of an adaptation to the new technological environment. The technological change in people's behavioral patterns was recognized firstly as a threat to the newspaper industry but after a while it was embraced and adjusted to. Advertising online couldn't be the only so

CPS: "Seeking a dynamic recovery"

I started writing for the Centre for Policy Studies , an independent free market think tank, co-founded in 1974 by none other than Margaret Thatcher, and Sir Keith Joseph. This is where the "Conservative revolution [of the 80-ies] began".  Here's a quote from Lady Thatcher about the CPS: "I do think we have accomplished the revival of the philosophy and principles of a free society, and the acceptance of it. And that is absolutely the thing that I live for. History will accord a very great place to Keith Joseph in that accomplishment. A tremendous place because he was imbued by this passion too. We set up the Centre for Policy Studies, and it has propagated those ideas, and they have been accepted." Margaret Thatcher, 1979 My first text for them, entitled  Seeking a Dynamic Recovery , was mostly on ideas on how to ignite a dynamic recovery in Western Europe. It focuses on innovation, investments and trade as the essential principles for surpassing th

Reinhart and Rogoff on the crisis and the recovery

Carmen Reinhart and Kenneth Rogoff, Harvard professors and the authors of the brilliant " This Time is Different ", did an interview for Barron's  last week on the causes of the crisis and the slow recovery from it. (In a post from  November  last year I summarized some of their main points.) Read the whole interview, it's very interesting. In a majority of their arguments I agree with them, some of them I have used repeatedly on the blog. For example:  "No two crises are identical. Policies differ, and political systems differ. But the common thread is this sustained buildup in a period of really bold optimism, often predicated on the expectation that if asset prices have gone up today, they are going to go up tomorrow and, therefore, we can borrow fairly indiscriminately without a problem. What was also very illuminating was that the U.S. wasn't alone. You saw Ireland, Spain, Portugal, Greece, and the U.K. with a very similar pattern of debt buildup.